CMS Initiatives for Bundled Payments to Improve Care

30 August 2011 Publication
Author(s): Lawrence W. Vernaglia

Legal News Alert: Health Care

"Bundled payment" is one of the health reform strategies that received considerable attention during the health reform debates. Under this payment model, a group of providers (potentially including hospitals, physicians, and post-acute care providers) receives a lump-sum payment for all services required to care for a beneficiary in connection with a specific diagnosis or condition. Commercial payors sometimes refer to this approach as paying on a "case rate," though the ambition behind bundled payment is to aggregate and coordinate the services of multiple providers. The vision behind this payment model is to incentivize providers to eliminate unnecessary services (for which they are now partly reimbursed under fee-for-service reimbursement) and to cause multiple, often unrelated, providers to work together to better coordinate the entire episode of care of the patient.

On August 23, 2011, the U.S. Department of Health & Human Services’ Centers for Medicare & Medicaid Services (CMS) posted a notice for a request for applications for organizations to participate in a new initiative to bundle Medicare payments to hospitals, physicians, and non-physician practitioners to encourage care coordination and cost reduction beginning in 2012. The “Bundled Payments for Care Improvement Initiative,” driven by the Patient Protection and Affordable Care Act (PPACA) of 2010, Pub. L. No. 111-148 (also commonly referenced as the health care reform law), can be found on the CMS Innovation Center Web site at This initiative, distinct from the National Pilot Program required by the PPACA to be in place by January 1, 2013, requires immediate action by interested providers, despite a number of currently unknown initiative elements that will be material to providers interested in the program.

Under this initiative, the CMS Innovation Center invites providers to design their own models of bundled payment under four general types of payment models: three models will involve retrospective bundled payments and the fourth will reimburse providers using prospective payments. Retrospective bundled payments means the usual fee-for-service payments are made and then the total payment for the episode is reconciled against the predetermined target price. Alternatively, prospective bundled payments means the negotiated single payment is paid as a lump sum in lieu of fee-for-service payment.

For purposes of this initiative, providers are defined as either: (1) physicians/practitioners, including suppliers, who may be paid separately by Medicare for their professional services (e.g., physicians, nurse practitioners, physician assistants, and physical therapists); or (2) participating organizations, which include all other providers or suppliers with whom the applicant plans to partner (e.g., hospitals, skilled nursing facilities, inpatient rehabilitation facilities, and home health agencies).

One entity (such as a hospital, health system, or physician/hospital organization) must accept financial responsibility for the program to Medicare. This convening entity need not be a Medicare-participating provider. It appears that CMS is permitting providers considerable flexibility to propose the parameters of their bundled-payment programs, including the clinical conditions, episodes of care to be covered, services to be covered in the bundle, target payment amounts, and how savings will be shared among the participating providers. This final “gainsharing” aspect allows providers to share any savings with the physicians and other practitioners that may result from the care coordination activities out of the bundled payment.

The four payment models into which providers must fit their programs include:

  • Model 1: Retrospective payment models around the acute inpatient hospital stay only, including all Part A services furnished to included beneficiaries during the hospital stay. Medicare will pay the hospital a discounted amount based on the payment rates established under the Inpatient Prospective Payment System (IPPS). Medicare will pay physicians separately for their services under the Medicare Physician Fee Schedule. Hospitals and physicians will be permitted to share gains arising from better coordination of care.
  • Model 2: Retrospective bundled payment models for hospitals, physicians, and post-acute providers for an episode of care consisting of an inpatient hospital stay followed by post-acute care, which would end, at the applicant’s option, either a minimum of 30 or 90 days after discharge.
  • Model 3: Retrospective bundled payment models for post-acute care where the episode does not include the acute inpatient hospital stay and would end no sooner than 30 days after discharge. The episode anchor is the initiation of post-acute care services at a skilled nursing facility, inpatient rehabilitation facility, long-term care hospital, or with a home health agency within 30 days of beneficiary discharge from an acute care hospital for an agreed-upon Medical Severity-Diagnosis Related Group (MS-DRG). In both Models 2 and 3, the bundle would include physicians’ services, care by a post-acute provider, related readmissions, and other services proposed in the episode definition such as clinical laboratory services; durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS); and Part B drugs. The target price will be discounted from an amount based on the applicant’s historical fee-for-service payments for the episode. Payments will be made at the usual fee-for-service payment rates, after which the aggregate Medicare payment for the episode will be reconciled against the target price. Any reduction in expenditures beyond the discount reflected in the target price will be paid to the participants to share among the participating providers.
  • Model 4: Prospectively administered single bundled payment models for the acute inpatient hospital stay only. The episode includes Part A hospital services and Part B professional services. Applicants are expected to propose a target price for the episode that includes a single-rate-of-discount off of the expected Medicare Part A and Part B payments for all hospital facility and professional services furnished during the hospitalization and related readmissions for all beneficiaries with the agreed-upon MS-DRGs. Physicians and other practitioners would submit “no-pay” claims to Medicare and would be paid by the hospital out of the bundled payment.

The models seek to coordinate patient care and encourage providers, by incentives, to deliver better care at lower costs through continuous improvement. Under all of the models, applicants must provide Medicare with a discount on Medicare fee-for-service expenditures. CMS will give preference to applications that offer a greater discount to Medicare, in the context of a robust programmatic design that ensures high-quality care for beneficiaries.

Applicants will be required to include the following information in their applications: (1) identify the clinical condition(s) through MS-DRGs, define the time period for the episode of care, and identify the services included in the bundled payment, among other criteria; and (2) plan and implement quality assurance and improvement activities as a condition of participation in this initiative and participate in CMS quality monitoring by reporting appropriate quality measures. During the demonstration, CMS will carefully monitor the program to ensure improved clinical quality, patient experience, and outcomes of care throughout participation in the initiative. The performance period for Bundled Payments for Care Improvement Initiative agreements will be for three years, with the possibility of extending an additional two years.

Organizations are invited to submit proposals that define episodes of care in one or more of these four models by October 21, 2011 for Model 1 and by March 15, 2012 for Models 2 – 4. However, interested organizations must submit a nonbinding letter of intent (LOI) by September 22, 2011 for Model 1 and by November 4, 2011 for Models 2 – 4. If an interested organization wishes to receive historical Medicare claims data in preparation for Models 2 – 4, a separate research packet and data-use agreement must be filed in conjunction with the LOI. The Medicare claims data is intended to enable potential applicants to develop robust episode definitions and discount proposals based on the historical experience of providers in the applicant’s geographic area.

The anticipated program start date is the first quarter of 2012 for awardees of Model 1. CMS has not indicated the anticipated start date for Models 2 – 4. CMS also encourages entities to participate in this program, the Medicare Shared Savings Program, the Innovation Center Pioneer ACO and medical home initiatives, and other shared-savings initiatives to improve care coordination and the quality of care. However, CMS reserves the right to potentially subject these entities to additional requirements, modify program parameters, or ultimately exclude participation in multiple programs, based on a number of factors, including the capacity to avoid counting savings twice in interacting programs and to conduct a valid evaluation of interventions.

There are a variety of unknowns in the Bundled Payments for Care Improvement Initiative, including what limitations will be placed on provider gainsharing distributions and the criteria CMS will use to evaluate the applications. Violations of applicable laws and statutes, such as those regarding physician self-referral prohibitions, civil monetary penalties, anti-kickback, anti-fraud, or other Medicare rules and regulations may occur in certain situations, and CMS has not yet defined potential waivers of such laws that may be applicable to this program. For many models, providers will need to commence negotiations with physicians and other providers promptly. Additionally, applicants must demonstrate to CMS their ability to bear the risk of loss under the bundled payment, by various methods including irrevocable letters of credit. 

Legal News Alert is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and our colleagues. If you have any questions about this update or would like to discuss this topic further, please contact your Foley attorney or the following:

Shilpa S. Patel
New York, New York

Lawrence W. Vernaglia
Boston, Massachusetts

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